Despite the OPEC currently producing at its highest level for 25 years, oil prices will continue to hover around $30-$40 a barrel band in the foreseeable future, most of the analysts strongly feel.
Demand, as opposed to supply, is now dictating the course of the oil market. Global oil demand is expected to rise by 2.5 million bpd this year, soaking up most of OPEC’s spare crude production capacity and leaving the oil markets vulnerable to any disruption in the long supply chain.
As we reach the peak of the summer holidays season, the focus in the major industrialized economies of the world seems to be shifting from the summer driving season toward the coming winter. In terms of the global energy equation, it indicates the new emphasis will be on heating oil rather than gasoline.
As per reports, the US middle distillate stocks are close to the bottom of their historical range and with rising demand, stock cover continues to fall. Analysts feel that the United States will need to replenish heating oil stocks over the remainder of the summer, but with imports of both crude and products running at record levels and refineries operating close to capacity, they may be hard pressed to do so.
The monthly oil report of the London based Center for Global Energy Studies (CGES), released on Monday, said “Unless oil demand growth slows significantly in the second half of 2004, there is no likelihood that oil prices will fall below $30 a barrel. It seems that oil prices are likely to remain in the $30-$40 a barrel range for some time yet.”
Absolute stocks have reportedly been drawn down over the last three years by an average 0.4 million bpd, down 450 million barrels on this time three years ago. At the same time, the global demand has also been rising, reducing the forward cover by 10 days in the process. “This overall stock tightness will, therefore, prevent any fall in (crude) prices, with Brent expected to average $38 a barrel over the remainder of 2004,” the CGES report went on to project.
Strong oil demand growth has soaked up spare refining capacities in the US and China, the world’s two largest oil consumers. This is putting a strain on oil import terminals and tanker capacity as increasing volumes of both crude and products are sucked not only from Africa and the Middle East but also from Europe.
The International Energy Agency (IEA) feels that the sizzling growth in the world oil demand will cool somewhat to 2.2 percent in 2005, as China and other petroleum starved countries approach their limits for refining and transporting crude. China is already endeavoring to cool down its economic engine, to an annual growth rate of around seven to eight percent.
According to the IEA in its monthly oil report released last week, demand next year will average 83.2 million barrels a day, and crude supplies from Russia, Angola and Brazil will meet the bulk of the increased needs.
Although the IEA avoids forecasting prices, it suggested strongly in its latest monthly report that there was little reason for the global crude markets to expect (significant) lower prices any time soon.
“Demand is strong at the moment,” said Paul Hornsell, head of energy research at Barclays Capital in London. “As a result of this looming capacity crunch, importers will have to dip deep into their already limited inventories this (coming) winter. Oil prices will remain high and volatile, and a supply problem any where in the world could cause them to spike (even) higher,” Horsnell believed.
For at least some time to come, the oil producers could continue to be on the swing, as far as the global crude prices are concerned.
